Recently, I wrote an article about the new paradigm in revenue management (a special thanks to all the people who have read it!) and now, I’d like to take that discussion a step further, by analyzing, in detail, the imperfect dichotomy between historical data and future demand data.
Within the hospitality industry, a great deal has been discussed recently about the current irrelevance of historical data in revenue management, due to the unforeseen market conditions that we’re all living through.
The logical conclusion to these discussions is that future demand data (some would say, the direct opposite of historical data) must be prioritized when determining room rates, as it provides actual data from which to make an informed pricing decision – with that, I don’t disagree.
That being said, as a data scientist, I’d like to offer a slightly different perspective: in my opinion, there is no dichotomy between historical data and future demand data because, in reality, we are always talking about data that refers to actions taken in the past.
I understand that you might be a bit confused, but stick with me here, and I’ll explain further…
First, let’s look at historical data… The main metrics that are at the heart of traditional revenue management – such as pickup, occupancy, RevPAR and ADR – are all quantity indicators that we observe to-date.
The projected pickup or RevPAR on a future date does not give us an indication of what will actually be; it simply describes a future projection of the situation we see, in front of us, today. In other words, historical data reaches its maximum limit today – in fact, in the present, minus one second.
Now, let’s examine future demand data in greater detail… In most cases, future demand (a.k.a. forward-looking demand) is based on data compiled about travelers’ flight searches, which obviously, have happened in the past. This sounds better, in theory, because searches can show travel intent, but in reality, are we truly “seeing” the future, any more than we would be using historical data?!
In truth, airline flight searches – just like traditional PMS data – reach their limit today, not tomorrow. There is no data that describes to us the flight searches that people will do tomorrow, simply because it hasn’t happened yet.
So, let’s examine the perceived dichotomy of On-The-Book vs. Searches, as effective revenue management data.
On-The-Book vs. Searches
What we are able to monitor are the searches, to-date, that people are doing for travel on future dates; in revenue management, these searches give us an indication of the total demand for a particular destination.
As of yet, they are not actual bookings (which I will call, “materialized demand”); instead, they remain “potential demand” – and I believe this is a more accurate term for what we, in revenue management, should use to establish more accurate room rates. (This is my opinion but, if you have other/better ideas about other terms would be more appropriate, I’d love to hear them; send me an email at email@example.com with your thoughts).
Before we move on to the real “meat” of the debate, let’s quickly recap…
Potential Demand (formerly called forward-looking data) represents all the people who have searched for a specific hotel or a specific destination.
Materialized Demand (formerly called historical data) is represented by the people who have searched for AND booked a specific hotel in a specific destination; in truth, materialized demand refers to a property’s on-the-books data.
TRUTH: Based on our examinations of these two concepts, it is difficult to see a dichotomy between historical data and future data, simply because future data does not exist in either case; therefore, there isn’t a winner in the debate about on-the-book vs. searches because, in reality, the two data sources are complementary.
The Paradigm Shift in Revenue Management
The paradigm shift in revenue management is in the new ability to analyze PMS data, PLUS new data sources (including searches), to calculate the overall unconstrained demand.
Traditionally, revenue management systems (RMS) have tried to deduce the spending power of tourists on future dates, basing their analysis on past behavior (historical hotel data); now, using flight searches and other demand indicators, it’s possible to understand the spending power of tourists today, on future dates.
Today, by using new data parameters, analyzed by advanced, machine learning-based technologies (such as Lybra’s Assistant RMS), hoteliers can significantly increase the accuracy of their forecasting and, as a result, the accuracy of their room rates.
So that leaves us with one final question: is historical data still important for effective revenue management, in 2021 and beyond?
In 2020 and, so far in 2021, historical data has been made irrelevant because of our unprecedented market conditions; while restrictions continue to limit and, effectively, eliminate consumers’ ability to travel, historical data can give a very minimal contribution – if any – to the elaboration of accurate forecasts, as you can no longer compare year-over-year, or even month-over-month, data.
Similarly, when the market restarts, historical data will have less importance than directly observing, through flight searches:
How many people are searching for a specific destination or hotel (Potential Demand)?
Examining their spending capacity (i.e. are they searching for first-class, business or economy rates?)
Their travel preferences (solo vs. family travel, backpacker vs. luxury, business vs. leisure, etc.)
To be competitive in the post-COVID world, hotels must embrace the new data now available to them, and new technologies that will support their profitability. Revenue management companies must be able to provide hotels with solutions that are able to collect and analyze this data, condensing it into actionable insights that will help the revenue manager establish a more effective revenue management strategy, and as a result, set more accurate prices.
Right here, in this place of preparedness and success, is where the heart of the new revenue management paradigm beats fiercely, empowering hotels with the data and tools necessary to remain competitive, no matter how potential demand changes.
All of us, at Lybra, will meet you there.
This article is written by our RevTech Partner Lybra
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